- Trump's election win sparked a surge in the S&P 500, but risks from China loom.
- China could significantly retaliate against Trump's proposed 60% tariff, Capital Economics said.
- Tech is at risk, as mega-cap firms like Apple and Tesla manufacture and sell products in China.
The stock market has zoomed higher since President-elect Donald Trump's win last week, with the S&P 500 notching a quick 5% gain.
Yet, while Trump's win opens the stock market to potentially more upside via tax cuts and deregulation, it also makes it more vulnerable to other risks.
According to chief market economist John Higgins of Capital Economics, the biggest risk looming for the S&P 500 is China, specifically, its potential reaction to another Trump trade war.
"Perhaps the biggest risk to the S&P 500, given that a bubble in the index has been inflated by hype around AI, would be a retaliatory clampdown by China on US big-tech firms' operations in its territory," Higgins wrote in a Monday note.
During his campaign trail, Trump proposed a 60% tariff on all goods imported from China, which would be a sharp escalation from the 25% tariffs he placed on a select list of goods during his first administration.
If Trump's proposed 60% tariff against China is enacted and the country responds aggressively, it would likely pressure some of America's most important companies, like Apple and Tesla, which manufacture and sell their products in the country.
China can do anything from restricting the sale of goods from American companies within its country to disrupting American companies' manufacturing operations.
But Higgins believes that's an unlikely outcome, as an escalating trade war would hit China's already struggling economy.
"Retaliating in that way would undermine the image China has been trying to cultivate of a responsible superpower," Higgins said, adding that if it responds too aggressively to a second round of Trump tariffs, it could lose access to technologies that are integral to AI.
Instead, China would likely take a more targeted approach in responding to a second round of Trump tariffs.
"We suspect China would retaliate in more subtle ways, such as restricting supply of rare earth metals and older generation semiconductor chips," Higgins said.